"Winding back negative-gearing, more aggressive capital gains taxation, and a range of similar disincentives would take the heat out of “high land value” housing, while arguably having a marginal effect on down-market housing in the burbs."

Negative gearing would work well if it applied to new houses only; that would add to housing stock. Capital gains taxation also is fundamentally wrong when applied to genuine gains in manufactured goods.

If you want to take the heat out of "high land value" housing there is one tried and true method which always works - if the State governments have the honesty and courage to apply it - land tax.

http://www.taxreform.com.au

The housing market is only the way it is because interest rates are too low leading to inflation in housing prices. Hiking interest rates a couple of percent would sort it out quicksmart. The government will do everything it can to avoid that happening but it does not matter - Mother Nature is now starting to intervene and, with oil supplies diminishing and petrol prices rising, this pseudo-interest rate rise is now starting to be imposed. Once it gets going you will see seachange and treechange communities becoming non-viable through high transport and food costs and their inhabitants will end up as refugees back on the fringes of the very cities they tried to escape from.

Australians are about to be reminded that debt and wealth are not the same thing. Pity our young families on the outskirts of our cities with large mortgages, high costs (from young children), lower than average incomes and long distances to travel to work. They will be hardest hit. Maybe they can rent out a room to a refugee sea/treechanger to try to get by!

Another obvious solution to excessive housing prices in the central city areas would be to improve infrastructure in outlying areas thus encouraging the movement of employers to less costly business and housing locations. As a former employer I found it worked well with my employees (and helped me with employee retention) to have the business within a reasonable commute to their homes.

A major problem with this approach is the local and state governments lack of planning and infrastructure initiatives. To encourage businesses to move to the outlying areas requires the infrastructure to be in place; major highways, rail and bus service, water and sewer services, 3 phase electrical service, and of course quality telephone and very high speed Internet capacity.

This can not be achieved with the NSW state and local governments $200,000 tax on each new building block approved which is followed with a wink and a nod but no guarantees that the required services will ever be constructed

Bruce says that outer suburban infrastructure cannot be improved "with the NSW state and local governments $200,000 tax on each new building block approved which is followed with a wink and a nod but no guarantees that the required services will ever be constructed".

True. The solution is to admit that infrastructure increases land values, and finance it accordingly -- by taxing increases in land values. Then the government doesn't get its money unless it actually delivers the infrastructure.

This mechanism not only protects property owners against arbitrary taxation, but gives governments a fiscal incentive to build infrastructure that increases land values for the benefit of property owners. So the government builds infrastructure that would not otherwise be built, and property owners get windfalls that they would not otherwise get. As long as the tax does not take away ALL of the increase in land values, it leaves property owners better off.

For more detail, see e.g. Prosper Australia Working Paper No.7, at http://grputland.com/working/paper07.htm .

Does anyone deny that house prices are market driven, reflecting a balance of supply and demand factors? Supply side factors like land releases, approval process conditions and bottlenecks, and government charges. Demand factors like the birthrate, house occupancy, immigration rate, temporary resident influx.

Oh yes, I'm sure the availability of capital has an effect. But answer me this: If interest rates went down to 1% and half the population died, would house prices increase or decrease?

I think that there needs to be an advancement of the thought processes applied to house prices. The blind men and the elephant approach is great in pantomimes, especially when all the small children start shouting out the bleeding obvious, but to see it on a forum like this is tedious.

Nice riddle, Fester! But too much for a small brain like mine, I’m afraid. I’ll keep it simple.
‘House’ prices are not only a house, but land as well. House building is a truly competitive market, so your supply and demand conditions frame the market.
Land is different. No-one makes it. We simply claim what is there already, and because it is fixed in supply, market conditions don’t apply or work. Scarcity forces the price ever upwards. Population increases exacerbate the scarcity, so your scenario of halving the population should have the opposite effect, and cause land prices to fall. But the landowners won’t sell unless forced to by their circumstances, so land price will stay artificially high until enough landowners are close to financial ruin. 1% interest rates would stave that off for a long time, I suspect, so the land would just stay vacant – out of use, and an economic loss to the community. Of course, a land tax, as advocated by some on this thread, would encourage them to sell earlier and thus put the land back into productive use.